Curious PAYE figure on first Payslip...

[darossi]

Hello all

I have recently taken on my first contractor role after being permanent for several years.

I opted to go down the umbrella route and after speaking to 3 or 4 companies, I decided to go with Parasol (yup, I've since found all the horror stories!).

I had used several "take home pay" calculators and done the sums myself to get a good idea of what my take home pay would be. I even got a couple of breakdowns from Parasol and Contractor Umbrella specific to my circumstances, and they both came back with similar amounts which was reassuring.

Here's what Parasol's tailored calculation said I could expect on a weekly basis (I'll getting paid monthly):

Income: £375 daily rate x 5 days = £1875
Expenses: £0
Employers NI: £207.55 ('Employment Costs')
Employees NI: £96.98
Employee Tax: £461.44
Umbrella Margin: £27.50
Total Net Income: £1081.53 (around 58% take home pay)

Contractor Umbrella's calculator came back with a net income of £1056, so fairly similar.

I began this contract on 12th November and therefore was expecting to be paid roughly 3x the amount above (£3244.59) approx as I have worked only 3 weeks of November in this contract. For the first week of November I was still in my previous permanent job and received my last wages for that job in mid October (they had paid me extra to cover the days I worked in November).

Now, I have recently received my first Payslip from Parasol for work completed in November:

Income: £5625 daily rate x 15 days = £5625
Expenses: £150
Employers NI: £569.52 ('Employment Costs')
Employees NI: £372.94
Employee Tax: £249.64
Umbrella Margin: £119.50
Total Net Income: £4278.40 (approx 76% take home pay)

My take home pay was much more than I expected. Obviously the thing that took me by surprise was the Employee Tax.

I rang Parasol to confirm this. Even taking into account the £150 expenses which were not in the original estimate, they agreed it seems a very low amount of PAYE tax.

I had been permanently employed by another company before this, where I was in receipt of taxable benefits which no longer apply and the tax office changed my tax code from 683L to 740L when I started contracting to take this into consideration.

Parasol said all the tax figures etc are calculated by their computer systems and "are correct." The guy I spoke to suggested that my tax payments would even out over the year(?).

The other thing I noticed was that the Employee NI figure was greater than I expected.

The weekly esitmate I had been given was £96.98 per week. I worked only 3 weeks in November yet the Employees NI I paid was £372.94.

Can anyone help me to understand why the PAYE tax was so low and why the Employee's NI figure was greater than 3 times the estimate?

[Wary]

Dunno whether they still do it but they used to calculate the Employment Costs as if calculating Employers NI, but they wouldn't first deduct the expenses. They would pay HMRC the true Employers and pocket the difference. In other words, they're effectively charging you 13.8% of your expenses above & beyond the agreed weekly fee.

If the Employment Costs are greater than the expected Employers NI, this may partly explain why.

[LisaContractorUmbrella]

The change of tax code has given you an additional £570 per year tax free allowance which will have had an impact on the tax that you pay but it would be difficult to make a complete assessment of the figures without knowing what was on your P45

[darossi]

The change of tax code has given you an additional £570 per year tax free allowance which will have had an impact on the tax that you pay but it would be difficult to make a complete assessment of the figures without knowing what was on your P45

Hi Lisa, thanks for the reply.

On my P45 which I gave to Parasol is the following information:

Leaving Date: 9/11/12
Total Pay to Date: £26,210.57
Total tax to Date: £4876.16
Tax code at leaving date: 684L (not 683L as said in previous post).

Does that help at all?

Thanks!

[LisaContractorUmbrella]

Hi Lisa, thanks for the reply.

On my P45 which I gave to Parasol is the following information:

Leaving Date: 9/11/12
Total Pay to Date: £26,210.57
Total tax to Date: £4876.16
Tax code at leaving date: 684L (not 683L as said in previous post).

Does that help at all?

Thanks!

Were you paid weekly or monthly in your old job and what was you first payment date with your umbrella company?

[darossi]

Were you paid weekly or monthly in your old job and what was you first payment date with your umbrella company?

I was paid monthly in my last job.

I worked 15 days in November (12th to 30th) and then put in my timesheet with Parasol so they could bill the agency accordingly. The agency paid Parasol on the 7th December (the November bill) and Parasol forwarded me the funds on the same day.

[LisaContractorUmbrella]

I was paid monthly in my last job.

I worked 15 days in November (12th to 30th) and then put in my timesheet with Parasol so they could bill the agency accordingly. The agency paid Parasol on the 7th December (the November bill) and Parasol forwarded me the funds on the same day.

If your final payment date was before you leaving date and before 6th of November then you will have accrued an additional month's tax free allowance as the payroll month runs from 6th of one month to the 5th of the following month so that could be the explanation

[darossi]

If your final payment date was before you leaving date and before 6th of November then you will have accrued an additional month's tax free allowance as the payroll month runs from 6th of one month to the 5th of the following month so that could be the explanation

Ah perhaps that's why... although I left my previous company on 9th November, my last wages were actually received on 26th October (they just paid me a bit more to cover the extra days I would be working from 26th to 9th Nov).

So in the eyes of the taxman, I didn't receive any wages in November at all therefore I built up a month's tax free allowance.

Well if that's the case, then I'm happy!

[LisaContractorUmbrella]

Ah perhaps that's why... although I left my previous company on 9th November, my last wages were actually received on 26th October (they just paid me a bit more to cover the extra days I would be working from 26th to 9th Nov).

So in the eyes of the taxman, I didn't receive any wages in November at all therefore I built up a month's tax free allowance.

Well if that's the case, then I'm happy!

Yep that's basically the way that it works - your tax free allowance is divided by 12 and then one 12th is attributed to each month regardless of your earnings so if you miss a month, your next month's earnings basically have 2 tax free allowances.

Your umbrella company really should have been able to explain this to you - it would have been perfectly obvious

[scope]

When I was with Parasol I could never work out what the next pay was going to be, despite billing the same number of days, and expenses being similar, they seemed to make up the numbers as they went along..

I left once they started charging "Employment Costs" (about a year ago) that where much higher than NI and couldnt explain (in plain english) what the charges were for.